Discussion Paper

The author argues that the economic benefits of low gasoline prices for the U.S. economy have fallen substantially since the reemergence of America as a major oil producer. The old rule-of-thumb that a 10% fall in the oil price raises inflation-adjusted U.S. GDP by 0.2% is too large—the impact on economic activity should be closer to zero, and may even be negative if consumption grows slowly. The reasons for this change are straightforward, if underappreciated: (i) the value of oil production accounts for a larger share of the U.S. economy; and (ii) consumers are not spending the windfall like they used to because of higher debt levels, limited access to credit, slow wage growth, and an older population.

Comments and Questions

Ascribing poor consumption growth in the US to debt is not quite correct, or at least is only part of the story. The second graph on http://www.philipji.com/item/2015-06-24/the-history-of-the-US-economy-in-one-graph shows that household debt service payments as a percentage of disposable income is at its lowest level in 35 years. But that has
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...not helped to push up consumption.

The real reason for consumption not taking off is that a huge number of US households have had years of their accumulated saving destroyed. The US Survey of Consumer Finances 2010 showed that the median household's net worth was at levels not seen since 1992. That is to say that the median household had lost 18 years of accumulated saving. If you assume that the median household had no financial assets worth the name it would have to double its saving rate for 18 years. So far six years have passed since the crash and the first graph on http://www.philipji.com/item/2015-06-24/the-history-of-the-US-economy-in-one-graph shows that the gap between disposable income and consumption which widened as a result of the crash, has not narrowed at all.

This is also the reason that recoveries that follow severe asset market crashes are very slow. The mechanism has been explored in my book "Macroeconomics Redefined" (http://www.amazon.com/dp/B00ZX9O5XQ).